The post-election market melt-up took a pause last week, with the S&P 500 declining by 0.06 percent to 2,258.07. Despite the slight drop, the benchmark index is still up 10.48 percent year-to-date, and just 0.60 percent below the all-time closing high. That record level was actually hit this past Tuesday but stocks drifted lower for the rest of the week due in part to mixed economic data and heightened geopolitical uncertainty. Another issue weighing on equities last week was the latest decision on monetary policy from the Federal Open Market Committee (FOMC). Indeed, officials on Wednesday announced that the target range for the federal funds rate would be raised by 25 basis points to 0.50-0.75 percent. That was the first interest rate increase in a year and only the second hike since the “Great Recession.” It was widely expected that the Federal Reserve (Fed) would raise rates this month but the pace of interest rate normalization going forward could be faster than some analysts had anticipated. For example, the updated projections of where committee members see interest rates heading imply three quarter point hikes in 2017, up from two in September, and the market-implied probability of the next rate increase occurring at the March FOMC meeting has risen sharply.
However, there will be several vacant Fed positions for President-elect Donald Trump to fill over the next few years, which could lead to an even faster pace of normalization should more “hawkish” members be added to the committee. Fed Chair Janet Yellen in the press conference after the policy announcement was asked about her thoughts on the incoming administration but stressed that it is simply too early to judge how fiscal policy will affect the committee’s outlook. Chair Yellen added that “all the FOMC participants recognize that there is considerable uncertainty about how economic policies may change and what effect they may have on the economy.” Overall, this latest announcement from the Fed was a bit more hawkish than the market might have expected, which could give some traders and excuse to take profits at these lofty levels. However, retirement investors with relatively long time horizons should focus less on the near-term path of monetary policy and more on building wealth through consistent participation in the highly resilient stock market. Such efforts can be enhanced with the use of tax-advantaged savings vehicles, dollar-cost averaging, and regularly consulting with a professional financial advisor. As always, we are here to help with any questions you may have.
To recap a few of the things we learned about the economy last week, the positives included that trade-related inflation pressures declined, the nation’s current account deficit narrowed, homebuilder optimism jumped, small business owner sentiment surged, gauges of both national and regional manufacturing activity rebounded, and the number of Americans making first-time claims for unemployment benefits remained near a historically low level. As for the negatives, mortgage and refinance applications declined, housing starts plunged, building permits fell, retails sales grew by less than expected, industrial production softened, capacity utilization decreased, business inventory growth tumbled, and both consumer and wholesale inflation pressures continued to build. This week the pace of economic data slows down but there are still several important reports on housing, employment, wages, consumer spending, and inflation scheduled to be released, along with the final update to the government's official estimate of U.S. gross domestic product (GDP) growth in the third quarter of 2016 due out this Thursday.
A more detailed snapshot of the U.S. economy can be found here.
What To Watch:
- Nothing significant
- MBA Mortgage Applications7:00 AM ET
- Existing Home Sales10:00 AM ET
- EIA Petroleum Status Report10:30 AM ET
- Durable Goods Orders8:30 AM ET
- GDP8:30 AM ET
- Jobless Claims8:30 AM ET
- Chicago Fed National Activity Index8:30 AM ET
- Corporate Profits8:30 AM ET
- FHFA House Price Index9:00 AM ET
- Bloomberg Consumer Comfort Index9:45 AM ET
- Personal Income and Outlays10:00 AM ET
- Leading Indicators10:00 AM ET
- EIA Natural Gas Report10:30 AM ET
- Kansas City Fed Manufacturing Index11:00 AM ET
- 5-Yr TIPS Auction 1:00 PM ET
- New Home Sales10:00 AM ET
- Consumer Sentiment10:00 AM ET
- Baker-Hughes Rig Count1:00 PM ET
- Bond Market Close: 2:00 PM ET
Sources: Econoday, Twitter, Bloomberg, Advisor Perspectives, ZH, WSJ, Goldman Sachs, J.P. Morgan, BofAML, Wells Fargo, FRBSL
Post author: Charles Couch